Budget 2013: When P Chidambaram’s luck finally ran out

Chidambaram has always presented Budgets when growth was strong. This was his first ‘slump’ Budget and by this time next year we will know whether his maths works out.

P Chidambaram may or may not be one of India's best finance ministers, but he is certainly one of the luckiest.

When he presented his first Budget in 1996, the economy at the time was still on a tear and this was Chidambaram's first stroke of luck. Growth was above 7%, and the fiscal deficit had been managed down by Manmohan Singh to 4.5% from close to 8% in 1991. A mark of a good finance minister is one who makes use of the opportunity and the headroom he has been given and Chidambaram saw his chance and took it. In his 1997 'Dream Budget', he cut taxes sharply for both individuals and corporates and put India on a path to a low tax regime.

But barely four months after the Dream Budget, the Asian crisis hit and growth took a dive. One month before that crisis, he demitted office and this was his second stroke of luck. It was left to his successor, Yashwant Sinha, to handle the crisis.

Chidambaram's third piece of luck was to begin his tenure as FM in 2004, at the tail end of a long slump which saw industry being put through the wringer. He would preside as FM over the biggest boom the Indian economy has seen. Another mark of a good finance minister is to not mess too much with a boom and he didn't. Again, he demitted office just before Indian economy would face the whammy of the global economic crisis, and this was being fourth time lucky. Pranab Mukherjee had to deal with the economy in crisis.

But in 2013, Chidambaram's luck has finally run out. This will probably be the first year that he has presented a Budget when the economy was growing below 7% . Markets may be disappointed at the lack of big-ticket reforms, but others have been realistic, given that an election is round the corner. Former Union industry secretary Ajay Dua says: "Chidambaram always marries politics with economics deftly. His eighth Budget has this hallmark."

But former finance minister Yashwant Sinha terms Chidambaram a lucky FM. He argues that Chidambaram could present Budgets in high-growth phases because previous regimes initiated economic reforms. "In two of his earlier phases as FM, Chidambaram was lucky and enjoyed fruits of other people's labour. He must be judged by what happens next year."

Chidambaram has squared his Budget numbers this time around by assuming that tax revenues will jump sharply. To keep the deficit within the 4.8% projected for the next year, he hopes total revenues will rise by over 16%. Chidambaram expects tax revenues alone will rise by 19%. In an economy which faces sub-par growth, this is perhaps to hope for the biggest stroke of luck of all.

The Dream Budget Era: 1996-1997

The backdrop: When Chidambaram presented his first Budget in 1996, he was part of a broad political coalition essentially made up of a clutch of regional parties, and his speech that year reflected a balancing act, offering higher allocations to rural and social sectors, some income-tax relief to the salaried, while continuing to lower taxes. However, there was less uncertainty economically. Growth in 1995-96 and 1996-97 was well over 7% and deficits had come down from earlier years, leaving the finance minister substantial room for bold ideas.

What he delivered: Chidambaram delivered a dream Budget in 1997, sharply cutting both income and corporate taxes, delicensing many more industries, opening up health insurance, and removing tax on dividends. And while broader economic reforms began in 1991, the issue of tax rates and their rationalisation came into sharp focus that year. In the longer run, the legacy of the Dream Budget of 1997 was that it firmly set the path towards future cuts in tax rates. Any increases in tax rates were mostly managed through surcharges and cesses. Changes in tax rates in subsequent Budgets were never to be as dramatic as in 1997.

Stock market reaction: Sensex jumped by 5% on day of the Budget

What he failed to deliver: Chidambaram's big bet — that cuts in tax rates would lead to better compliance — didn't actually pan out. Though to be fair, the Asian crisis that was to hit a few months later was also a big dampener. Growth in 1997-98 slumped to 4.3%.

Our take: A dream Budget yes. But given the state of the economy and the deficit, a lucky FM as well.

Growth rates in budget years: 7-8%

Fiscal deficit: 4.8-5%

The Boom Years: 2004-08

The backdrop: With the 2004 elections, the Congress-led UPA government returned with a huge mandate for change. Chidambaram's main advantage? He came in when the economy was beginning to get out of a long slump. Over the next few years, Chidambaram had a dream run — strong growth and an ample increase in revenues which helped reduce the deficit. His constraint was that the UPA was supported by the Left parties. As finance minister, he had to find money to fund a new range of social welfare schemes such as NREGA.

What he delivered: He managed to reduce the fiscal deficit to a low of 2.5% of GDP in 2007-08 from 4.5% in 2004. At the same time, he could find the money to pay for all the big-ticket social programmes of UPA 1 such as NREGA as well as a loan waiver for farmers which crossed several thousand crore. On the revenue side, his 'Dream' Budget legacy was somewhat tarnished by a slew of unpopular taxes such as the fringe benefits tax, the banking cash transaction tax and the securities transaction tax.

Stock market reaction: Reactions to individual Budgets were mixed. But during his tenure as FM, the markets rose four-fold.

What he failed to deliver: Chidambaram's reductions in the deficit turned out to be short-lived and all too dependent on strong growth. But even during this phase, the finance ministry played games with the Budget numbers, moving subsidy expenses off the books and doling them out in the form of bonds rather than cash; this helped make the Budget deficit look smaller than it was.

Our Take: Chidambaram's luck continued in this phase of the Budgets, with strong growth helping him manage conflicting targets.

Growth rates in budget years: 7-9.5%

Fiscal deficit: 2.5-4%

Third Time Not So Lucky: 2013 -

The backdrop: This year, the lucky FM's luck ran out. While UPA 2 has been heavily battered by scandals, political uncertainty weighed less on Chidambaram's mind this time around as compared to the huge economic uncertainties he faces. He encountered the tyranny of five — growth at 5%, fiscal deficit at over 5%, and a current account deficit also over 5%. Given this, he couldn't trim expenditure too much because that would be deflationary. He couldn't lower the deficit beyond a point without raising tax rates or broadening the base.

What he delivered: Apart from some headline-friendly sops such as a bank specifically for women, the Budget was low on the big vision. But for an FM facing a slowing economy, a wide Budget gap and under pressure to deliver sops ahead of an election next year, perhaps this was the best that could have been expected.

Stock market reaction: The market didn't get what it was looking for — big reforms. Spooked also by ambiguity over its beloved Mauritian tax sops, the market dropped by 290 points or 1.5% on day of Budget.

What he failed to deliver: Any clear way out of the current mess. But perhaps that was asking for too much. Even a very capable FM would have had limited room for manoeuvre in the current economic climate, and with an impending election.

Our take: His biggest challenge will be to achieve tax revenue growth targets he projected in a weak economy.